At about $20 a share, Revlon (ticker: REV) trades for about 11 times estimated 2013 earning, versus about 25 for L'Oréal (LRLCY) and Estée Lauder (EL), and nearly 20 for Coty (COTY).

Two related factors help to explain the Revlon discount. The stock has a small public float, as Chairman Ronald Perelman, 70, owns 77% of the company. More significant, Perelman has a reputation as a shareholder-unfriendly anti-Warren Buffett. But in this case, patient investors could find it profitable to invest alongside the controversial financier.

Chris Mittleman, chief investment officer at Mittleman Brothers, a Locust Valley, N.Y., asset manager, calls Revlon "a classic example of an underfollowed small-cap situation. Revlon has a great franchise that can't be replicated, and it is wallowing at about half our estimate of its value."

Revlon is easily digestible, given its $1 billion stock market value and $1.2 billion of debt. One of the few analysts following it, Connie Maneaty of BMO Capital Markets, rates it Outperform, with a $25 price target.

PERELMAN'S REPUTATION for conflict was reinforced recently when Revlon paid a penalty to settle Securities and Exchange Commission accusations that his holding company, MacAndrews & Forbes, had deceived investors about the fairness of a voluntary exchange offer in 2009. Back then, in the aftermath of the financial crisis, Revlon was heavily indebted and trading at about $5. Perelman proposed swapping a like amount of preferred stock for Revlon common, and secured the participation of about half of the company's other holders. Soon after, however, Revlon reported better-than-expected profits, and the common quickly traded up toward $20.

The new preferred, meanwhile, gave holders little upside. "By erecting informational barriers, Revlon kept critically important information from its board and in turn, misled investors," the SEC said. Revlon agreed to the settlement without admitting or denying guilt.

Mittleman says the public rebuke probably is good for Revlon holders because "it will make it harder for Perelman to try something again."

For years, Revlon was viewed badly on Wall Street, as it struggled to hold its own against the leaders in mass-market cosmetics, notably L'Oréal and P&G, while shouldering onerous debt. L'Oréal owns the Maybelline and L'Oréal brands, while P&G controls CoverGirl. Revlon's products are available in drugstores, and its largest customer is
Wal-Mart StoresWMT -0.6397497867500711%Wal-Mart Stores Inc.U.S.: NYSEUSD69.89
-0.45-0.6397497867500711%
/Date(1481300798653-0600)/
Volume (Delayed 15m)
:
1245922
P/E Ratio
15.215217391304348Market Cap
216168169224.158
Dividend Yield
2.8575510787255323% Rev. per Employee
210427More quote details and news »WMTinYour ValueYour ChangeShort position
(WMT), which accounts for about 20% of its sales. Revlon generates more than 40% of its sales outside the U.S.

Founded in 1932, Revlon was run for decades by the legendary Charles Revson, before Perelman took control in the mid-1980s. The company sells makeup, mascara, lipstick, nail polish, and other products under the Revlon and Almay brands. Under CEO Alan Ennis, the company has boosted sales and profits modestly in recent years, while refinancing debt to cut interest expense. It has also introduced new products and made small acquisitions, including the nail-polish makers Sinful Colors and Pure Ice.

Revlon earned $1.59 a share from operations last year on $1.4 billion in sales. The latest quarter was disappointing, as sales rose just 0.4%, to $332 million. Core earnings per share fell to five cents from 16 cents a year earlier, according to BMO's Maneaty, who cut her 2013 earnings estimate to $1.75 a share from $1.89. Revlon executives weren't available to talk with Barron's.

MANY CONSUMER-PRODUCTS outfits are valued based on enterprise value (equity value plus debt), divided by earnings before interest, taxes, depreciation, and amortization. Revlon is valued cheaply relative to its peers at about nine times estimated 2013 Ebitda of $250 million (this projection includes spending on "permanent displays" at retailers). Mittleman figures Revlon, which pays no dividend, can generate $100 million in free cash flow this year, giving it a 10% free cash-flow yield, high relative to peers.

The Bottom Line

Revlon shares, now about $20, have been hurt by disappointing earnings and Ron Perelman's dominant equity position. But they could double in a takeover.

Coty, which has fallen to $17 from its initial-public-offering price of $17.50, has a $6.5 billion market value—more than 10 times projected 2013 Ebitda. Coty revenue stagnated in the nine months through March, and depends highly on the fragrance market, which is more volatile and celebrity-driven than Revlon's mainstay products. Coty has a better balance sheet, however.

A deal Perelman pulled off two years ago might point to his ultimate goal for Revlon. In 2011, he took private M&F Worldwide, a mini-conglomerate he controlled that produces banking checks and licorice extract. He waited until it had an earnings miss and the shares had plunged to $17 from $25 in a weak stock market. Perelman offered to ante up $24—and trumpeted the 41% "premium" this represented. He ended up paying a sweetened $25 to shareholders.

That's the same playbook Michael Dell is using in his pursuit of
Dell
(DELL). The M&F buyout was done at about five times trailing earnings. Barron's wrote favorably about M&F several months before the buyout occurred ("Cheap Stock...With One Big Catch," Jan. 24, 2011). Since the deal,
DeluxeDLX 0.31728514277831427%Deluxe Corp.U.S.: NYSEUSD72.72
0.230.31728514277831427%
/Date(1481300766180-0600)/
Volume (Delayed 15m)
:
76830
P/E Ratio
15.28Market Cap
3522723984.85657
Dividend Yield
1.6533480297602645% Rev. per Employee
311944More quote details and news »DLXinYour ValueYour ChangeShort position
(DLX), M&F's main rival in checks, is up 50%, suggesting M&F's value has risen, too.

The endgame at Revlon could be a sale at a nice premium to the current price. Patient investors willing to swim with a shark could be rewarded.